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Standing out or outstanding: Stock preferences of HDFC Mutual Fund

At a time when even the most experienced traders and investors are going clueless about the potential shape of recovery of the Indian economy and equity markets, one fund manager looks stoic and unmoved.

We recently interacted with one of India’s most experienced fund managers—Prashant Jain, ED and CIO of HDFC Asset Management Company. He not only shared with us his views on different sectors but also expounded on why India might emerge as a winner in the After Corona era. At the same time, he acknowledged the challenges that the coronavirus pandemic has imposed on Indian economy.

We also navigated the positioning of HDFC Mutual Fund’s equity oriented schemes under his direct management and found that he walks the talk. Like many times before, this time too he is shying away from hot sectors of today and investing in sectors and stocks that might make headlines tomorrow.

4 key topics he shared his views on

India’s external economy

Unlike many other emerging markets that predominantly rely on exports of commodities and electronic goods, India is one of the biggest importers of oil, gold and consumer electronics. Falling crude oil prices would immensely help India stabilize its external economy. Although remittances to India may slow up, India’s Balance of Payment (BoP) situation is likely to improve as India may achieve a trade balance given the slump in demand and lower exports.

Now that the government has been serious about making India self-reliant and creating awareness around being vocal for local, slashing the trade deficit appears to be a policy goal.

Changes in the consumer preferences After Corona

Prashant Jain highlighted that, India’s bottom 50% population in terms of household earnings contributes just 15% to India’s GDP. They are likely to delay their discretionary spending post lockdowns. Since the culture of savings has been largely replaced by that of borrowing and spending, many households don’t have adequate savings to support emergency situations. Those employed in the semi-formal sectors are going to be vastly affected. Their consumption patterns might change too. As a result, retail credit growth is likely cool off. As people would go back to simpler lifestyles, they should be able to save more.

Manufacturing might boom in India

Cost of manufacturing in China has gone up considerably in the last few years and, as a result, manufacturing started gradually moving out of China even before the coronavirus pandemic hit the world. Prashant Jain has been the second top boss of the mutual fund industry, after Nilesh Shah of Kotak Mutual Fund, to tell us that he clearly sees a trend among MNCs towards reducing their overdependence on China After Corona.

India has been drawing up plans to attract foreign investments. As a part of this effort, a few states such as Uttar Pradesh, Madhya Pradesh and Assam, among others, have introduced labour reforms—one of the key reforms required to make manufacturing attractive in India.

Jain also opined that, India’s ease of doing business has been moving in the right direction and cost advantages available in India would help grow the manufacturing base in India.

The government’s Rs 20 lakh crore economic package also focuses on 4 Ls—Land, Labour, Liquidity and Laws. It remains to be seen how far that takes India in terms of attracting foreign investments in manufacturing.

Market valuations

As markets fell nearly 40% from the highs of 2020 before rallying over 20% from the March lows, India’s Market-Cap-To-GDP ratio dropped to around 50. Jain shared an interesting observation that, whenever there’s any global uncertainty, FPIs sell heavily in emerging markets, including India, which leads to compression in the Market-Cap-to-GDP ratio. Historically, whenever the Market-Cap-to-GDP ratio has fallen below 60, the risk-reward has become favourable.

Also, in any 3 consecutive months during which FPI outflows have been very high, the markets have rallied in the subsequent 12 months. Net FPI outflows from Indian equity markets in the last three months (including first 13 days of May) have been in excess of Rs 47,000 crore.

Jain shared his years’ of market experience and explained the pros and cons of looking into future. With this approach he could avoid, IT stocks during the dotcom boom, infrastructure stocks during 2007-08, pharma stocks between 2014-15 and FMCG stocks at present.

He also mentioned losing potential gains for selling stocks and sectors that didn’t offer valuation comfort since markets took longer to correct valuations. However, the same approach also helped get some attractive bargains which were available at throwaway valuations—FMCG in 2007-08, Pharma stocks a couple of years ago and Power sector utilities at this juncture, among others.

In the ongoing COVID-19 inflicted bear market, schemes managed by Prashant Jain have been betting on some highly undervalued PSU companies and avoiding IT and FMCG stocks. These schemes have also reduced their exposure to pharma stocks by selling them in recent rallies.

Jain also mentioned that not all public sector companies are bad and not all private sector companies are good. According to him, the government offloading stake through the ETF route made PSUs unattractive as the government had to offer PSUs at lower valuations. But he quickly added that, if the ongoing strategic deal of an oil and gas sector company goes through, the tone will be set right for further disinvestments, which would then help unlock value in PSUs.

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.

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Ventura Securities Ltd. is a well diversified financial services firm offering Retail and Institutional Broking in Equities, Mutual Funds Distribution, Commodities Broking. Ventura operates in a network spread over numerous cities and locations in association with its business partners